The Del Castillo Company (DCC) has decided to acquire a computer for one of its hotels. The computer can be leased on a 5-year contract for $10,000 per year.

Payments would be made at the beginning of each year. Alternatively, DCC could purchase the computer for $30,000 by financing the entire cost of the computer with a loan to be amortized over a 4-year period. The annual interest rate would be 12% and payments would be due at the end of each year.

Maintenance costs estimated at $2,000 annually would be paid by the lessor under the lease alternative. The computer is expected to have a market value of $5,000 at the end of its useful life. Any gain on the sale will be taxed at DCC’s tax rate of 30%.

Assume the computer, if purchased, would be depreciated using the double declining balance method. Assume DCC’s cost of capital is 14%.
Required:
ib ae 3.
Determine the present value of the cost of leasing.
Determine the present value of the cost of owning.
Which do you recommend and why?